the choice of one alternative requires that another be given up. Example: Building vs. Parking Lot

Term

Economics is the study of how...

Definition

society chooses to allocate its scarce resources to the production of goods and services in order to satisfy unlimited wants.

Term

Decisions as to the proper allocation of resources within a society take place at different levels; e.g., individual, household, firm industry, state wide, and nationwide. Microeconomics is the branch of economics that studies____

Definition

decision making by a single individual, household, firm, industry, or level of government.

Term

Macroeconomics

Definition

is the branch of economics that studies decision making for the economy as a whole.

Term

Economics is a science because it follows the scientific method; e.g., (1) (2) (3)

Definition

identification of a problem, model development, data collection and testing of the model.

Term

A _____ is a simplified description of the reality used to understand and predict the relationship between variables.

Definition

model

Term

The role of assumptions in a model is to ...

Definition

simplify a real world problem.

Term

the objective of a model is not to ______ a real world situation, but to ______ it.

Definition

replicate/ mimic; explain

Term

Positive vs. Normative Economics. b/c economists may have different goals (scientists: explain the causes of economic events vs. policymakers: improve economic outcomes) economists may use different analysis and language such as ...

Definition

Positive Statements: Descriptive- make a claim about how the world is.Normative StatementsPrescriptive- make a claim about how the world ought to/ should be.

Term

The demand curve shows the..

Definition

shows the quantity demanded at different prices. essentially, it shows the quantity a demander is willing to buy at different prices.

Term

in the equation of a straight line, b =

Definition

the vertical intercept-- the value Y takes when X = 0

Term

slope, m, =

Definition

rise/ run. y2 - y1 / x2 - x1

Term

consumer surplus

Definition

the consumer's gain from exchange, or the difference between the maximum price a consumer is willing to pay for a certain quantity and the market price.

Term

Total consumer surplus is measured by

Definition

[image]

Term

an increase in the demand shifts the demand curve....

Definition

outward, up and to the right

Term

an increase in demand illustrates...

Definition

greater willingness to pay for the same quantity

Term

Important demand shifters: what kinds of things will increase or decrease demand?

Definition

-income-population-price of substitutes -price of complements-expectations-tastes

Term

a normal good is a good for which

Definition

demand increases when income increases

Term

inferior good

Definition

a good for which demand decreases when income increases (ramen)

Term

If two goods are substitutes,

Definition

a decrease in the price of one good leads to a decrease in demand for the other good.

Term

Naturally, an increase in the price of a substitute will

Definition

increase demand for the other substituted good.

Term

Good A is a complement to good B if...

Definition

greater consumption of A encourages greater consumption of B. (ink and printer)

Term

If two goods are complements, a decrease in the price of one good leads to...

Definition

an increase in the demand for the other good.

Term

Naturally, an increase in the price of a complement ...

Definition

decreases the demand for the complementary good.

Term

the supply curve is a function that shows ...

Definition

the quantity supplied at different prices. essentially, it shows the quantity a supplier is willing to sell at different prices.

Term

the supply and demand curve can be read both vertically and horizontally, therefore,

Definition

the supply curve tells us the maximum quantity that suppliers will supply at different prices or the minimum price at which suppliers will sell different quantities.

Term

producer surplus is

Definition

the producer's gain from exchange, or the difference between the market price and the minimum price at which a producer would be willing to sell a particular quantity

Term

total producer surplus is measured by

Definition

[image]

Term

a decrease in costs increases supply. therefore, a decrease in costs means that the supply curve shifts ..

Definition

down and to the right

Term

In the supply curve, higher costs mean that the supply curve shifts...

Definition

up and to the left.

Term

Important supply shifters:

Definition

-technological innovations and changes in the price of inputs (wages of oil rig workers increase/ decrease cost of producing oil)-taxes and subsidies (+10 up)-expectations (speculation)-entry or exit of producers (NAFTA)-changes in opportunity costs

Term

a decrease in the demand shifts the demand curve...

Definition

inward, down and to the left

Term

The expectation of a reduction in the future oil supply.... (laredo gas)

a situation in which the quantity demanded is greater than the quantity supplied.

Term

competition will push prices _______ whenever there is a surplus

Definition

down

Term

shortage

Definition

Term

competition will push prices _______ whenever there is a shortage

Definition

up

Term

equilibrium

Definition

the point at which quantity demanded is equal to quantity supplied

Term

Price ceiling

Definition

a maximum price allowed by law

Term

When there is a surplus, sellers have an incentive to decrease their price and buyers have an incentive to offer lower prices.

When there is a shortage, sellers have an incentive to increase the price and buyers have an incentive to offer higher prices. T

Definition

[image]

Term

Panel A: Unexploited gains from trade exist when quantity is below the equilibrium quantity. Buyers are willing to pay $57 for the 24th unit and sellers are willing to sell the 24th unit for $15, so not trading the 24th unit leaves $42 in unexploited gain from trade. Only at the equilibrium quantity are there no unexploited gains from trade.

Definition

[image]

Term

Panel B: Resources are wasted at quantities greater than the equilibrium quantity. Sellers are willing to sell the 95th unit for $50, but buyers are willing to pay only $15 so selling the 95th unit wastes $35 in resources. Only at the equilibrium quantity are there no wasted resources.

Definition

[image]

Term

A free market _______the gains from trade. The gains from trade can be broken down into producer surplus and consumer surplus, so we can also say that a free market _______ producer plus consumer surplus.

Definition

maximizes; maximizes

Term

Figure 4.4 illustrates how the gains from trade—producer plus consumer surplus—are maximized at the equilibrium price and quantity.

Definition

[image]

Term

When we say that a free market maximizes gains from trade, we mean three closely related things...

Definition

1. The supply of goods is bought by the buyers with the highest willingness to pay.

2. The supply of goods is sold by the sellers with the lowest costs. 3. Between buyers and sellers, there are no unexploited gains from trade and

no wasteful trades.

Term

An Increase in Supply Reduces ____and Increases ____

Definition

[image]

Term

An Increase in Demand Increases Price and Quantity An increase in demand shifts the demand curve up and to the right, moving the equilibrium from point a to point b, an increase in price and quantity

Definition

[image]

Term

Panel A: An increase in quantity demanded is a movement along a fixed demand curve caused by a shift in the supply curve. Panel B: An increase in demand is a shift in the demand curve up and to the right

Definition

[image]

Term

Panel C: An increase in supply is a shift in the supply curve down and to the right. Panel D: An increase in quantity supplied is a movement along a fixed supply curve caused by a shift in the demand curve.

Definition

[image]

Term

Price of Oil; Supply and Demand Shock

Definition

[image]

Term

price ceiling

Definition

maximum price allowed by law

Term

Price Ceilings Create Wasteful Lines At the controlled price, the quantity of gasoline supplied is Qs and buyers are willing to pay as much as $3 for a gallon of gasoline. But the maximum price that sellers can charge is $1. The difference between what buyers are willing

to pay and what sellers can charge encourages buyers to line up to buy gasoline. Buyers will line up until the total price of gasoline, the out-of-pocket price plus the time cost, increases to $3 per gallon. Time spent waiting in line is wasted time. The total value of wasted time is given by the time cost per gallon multiplied by the quantity of gallons bought.

Definition

5.2

Term

A Price Ceiling Reduces the Gains from Trade At the controlled price, Qs units are supplied and buyers are willing to pay just slightly less than $3 for an additional gallon of gasoline that sellers are willing to sell for just slightly more than $1. Although mutually profitable, these trades are illegal. If all mutually profitable trades were legal, the gains from trade would increase by the green plus blue triangle.

Definition

5.3

Term

Deadweight Loss

Definition

is the total of lost consumer and producer surplus when no all mutually profitable gains from trade are exploited.

Term

What creates a deadweight loss?

Definition

price ceilings

Term

When the price of oil is high, oil will only be used in the higher- valued uses. As the price falls, oil will also be used in lower-valued uses.

Definition

Term

When Prices Are Controlled, Resources Do Not Flow to Their Highest-Valued Uses Gains from trades are maximized when goods flow to their highest-valued uses. A price control prevents the highest-valued uses from outbidding lower-valued uses so some oil flows to lower-valued uses, even though it would be more valuable if used elsewhere

Definition

[image]

Term

In a Free Market Goods Flow to Their Highest-Value Uses If all units of the good are allocated to the highest-valued uses, then consumer surplus is the area between the demand curve and the price up to the quantity supplied.

Definition

[image]

Term

Consumer Surplus Falls Under Random Allocation When there is a price control, the buyers with the highest-valued uses cannot outbid other buyers, so goods will flow to any buyer willing to pay more than the controlled price of $6. If goods are allocated randomly to buyers with values between

$30 and $6, the average value will be $18. Consumer surplus under random allocation is the green area. If goods were allocated to the highest-valued uses, consumer surplus would be larger, the red plus green areas. Thus, a price control misallocates resources, reducing consumer surplus.

1/2 30 + 1/2 6

Definition

[image]

Term

rent control

Definition

price ceiling on rental housing

Term

Rent Control Creates Larger Shortages in the Long Run than in the Short Run A rent control below the equilibrium price generates a shortage. The short-run shortage is small since the apartment units are already built. In the long run, fewer new units are built and old apartments are torn down or turned into condominiums so the long-run shortage is much greater

Definition

[image]

Term

Rent Control Reduces the Building of New Apartments As rent control began to be debated in Ontario, the construction of new apartments plummeted. After rent control was put into place, fewer apartments were built than non-rent-controlled homes.

Definition

[image]

Term

price floor

Definition

minimum price allowed by law

Term

A Price Floor Creates a Surplus (Minimum Wages Create Unemployment) At the minimum wage, the quantity demanded of labor falls below the market employment level and the quantity supplied rises, creating a surplus of labor.

Definition

[image]

Term

a price floor reduces the Gains from Trade At the minimum wage, employers are willing to hire more workers at just less than the minimum wage and workers are willing to work additional hours for just more than W0. Although mutually profitable, these trades are illegal. If all mutually profitable trades were legal, the gains from trade would increase by the green plus blue triangles.

Definition

[image]

Term

A Price Floor Creates Quality Waste At the CAB-regulated fare, price is well above a seller’s willingness to sell. Sellers cannot compete by offering lower prices so they compete by offering higher quality. Higher quality raises costs and reduces seller profit. Buyers enjoy the higher quality, but would prefer less quality at a lower price. Thus, the price floor encourages sellers to waste resources by producing more quality than buyers are willing to pay for.

Definition

[image]

Term

Economic Growth

Definition

[image]

Term

physical capital

Definition

is the stock of tools including machines, structures, and equipment

Term

Human capital

Definition

is the productive knowledge and skills that workers acquire through education, training, and experience

Term

Wealth of Nations

Definition

Term

Technological Knowledge

Definition

is knowledge about how the world works that is used to produce goods and service

Term

institutions

Definition

are the "rules of the game" that structure economic incentives

Term

free rider

Definition

r is someone who consumes a resource without working or contributing to the resource’s upkeep.

Term

Economies of Scale

Definition

are the advantages of large-scale production that reduce average cost as quantity increases.